This week, we retain a bearish outlook as wider stock market pessimism and margining requirements for utilities caused by rising gas and oil prices looks likely to keep the bulk of buying interest in the EU subdued. The dramatic price drop of last week looks unlikely to repeat but given last Thursday and Friday’s low volumes of trading and general lack of interest in the market, EUA prices look set to drift lower while this energy crisis persists. Eventually buying demand should recover as the market remains short and speculators may have largely liquidated their long positions last week.  A recovery, however, depends on ability or appetite to buy EUAs to cover power sector emissions given soaring gas and coal prices. 

  • March 2022 TTF Gas trading above 200 Euros, prompting margin calls – EUA buying interest is likely to stay subdued in the short term as other commodity prices soar, necessitating more funding to maintain those positions. Monday’s gas trading has been volatile but not entirely bullish – so EUAs are doing very little of interest. Given funding requirements for already high commodity prices, EUA buying may not be a priority at the moment.
  • Why do EUAs get sold when other commodity prices increase? The crucial difference between EUAs and other commodities is you do not need to own an EUA to emit CO2, allowing some flexibility on the part of compliance buyers to sell some holdings and free up funds for maintaining positions on other contracts – like natural gas.
  • Low wind & cold weather forecast: cold temperatures similar to last winter are forecast – not good news for gas prices. That might usually be a bullish signal for EUAs, but with front month TTF Gas trading above 200 Euros, it might just put strain on power producers and could prompt further EUA liquidations.
  • Industrial demand destruction? Already two Volkswagen factories in Poland are suspending production. High gas prices could prompt significant cuts in European production and therefore emissions both direct and indirect (through power consumption). Longer term sanctions are also likely to impact the EU’s industrial output and therefore EUA demand.
  • Speculator selloff: publicly available funds like KRBN and Sparkchange have shown a drop in speculator holdings. Much of that speculator length in the market should be gone by now so a price drop this week probably won’t be so dramatic as last week. The ICE Commitment of Traders is not yet up to date to reflect changes in EUA holdings as of Friday.
  • Germany not backing calls for a cut-off to Russian oil, gas supply: Germany is arguing that sanctions must be able to be sustained long term – and running out of electricity in a few weeks might force them to lift the sanctions. If disruption to energy supplies isn’t too great, that might soothe the gas market and allow for a return to normal trading – meaning a resumption of the positive correlation between gas and carbon.
  • Technical indicators bearish: Futurestechs are saying that from a technical perspective EUAs must recover to €70.48 to suggest that the selling is done. The market is oversold on the RSI indicator, but has been for the last few days and continues to trend lower. We do note support at 58 euros however, which has held for much of Monday.

Outlook: bearish

  • Indicative EUA Price: €58.12
  • YTD Average EUA Price: €87.66
  • Month to date Average EUA Price: €67.62

Charts

1 – Dec22 EUA price chart 2 – cold blast of weather from the east

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